Share price reaction to stock market segmentation at Nairobi Stock Exchange

Abstract

In February 2001, NSE was segmented into three market segments MIMS, AIMS and FISMS. Segmentation of security markets has its adverse effects. Shareholders of firms moved from the main market to subsidiary market (AIMS) might find it difficult or incur additional costs in liquidating off their shares; and potential investors could lose interest in the firms thus making it difficult raising funds for worthwhile projects and this ultimately raises the cost of capital. The degree of investor recognition could be affected and thus ultimately affect the share returns which again has a bearing on the cost of capital. However segmentation of the market as a form of financial innovation could improve efficiency leading to a reduction in the cost of capital without a commensurate increase in systematic risk. This paper thus seeks to determine the extent to which market segmentation affected the share prices of the listed firms, liquidity and investor recognition. To document the return patterns surrounding the segmentation announcement as well as obtain residuals for hypothesis testing, the event study methodology pioneered by Fama et al. (1969) will be used to measure the stock price effects of NSE segmentation. An empirical study will be conducted using NSE listed firms as the population. The findings of the study is that share prices and liquidity were adversely affected by segmentation and thus it was a punishment to firms that were listed in AIMS without a commensurate reduction in cost of capital or financial innovation benefits.